Investors took a hit on Canadian cannabis stocks this past week surrounding concerns that industry valuations have stretched too far too quickly. The largest six cannabis companies in Canada have lost just over $11 billion in value since their 52-week highs. These six are now worth $13.7 billion based on Friday’s market close. While there has been broader market selling pressure, the Toronto Stock Exchange is 5.0% below the high this year compared to a 40.5% decline (New Cannabis Ventures Index – Canadian Cannabis LP Tier 1 Index) of the big six; Aurora, Aphria, CanniMed, CannTrust, Canopy Growth and MedReleaf. Although it is important to recognize the extreme level of volatility in the space, the big six are up an average of 251.7% from their 52-week lows, even after the recent market declines.
The largest producers in Canada are running a global marathon to see who can construct the world’s largest network of high-quality cannabis cultivation. Team Canada is running the race alone on the global stage since U.S. Attorney General Jeff Sessions rescinded the ‘Cole Memo’, squashing any hopes of Team USA competing in the near future. This lack of global competition has allowed Canadian Licensed Producers to expand globally with little to no competition. This has fuelled sector optimism, opening the floodgates to new capital, resulting in sky-high valuations.
As investors digest the recent pullback and hone in their expectations of earnings growth, the focus will shift from the ‘funded global developments’ to the assets in Canada that are supplying product to the newly minted recreational market this summer. Statistics Canada released some preliminary figures in December of 2017, estimating that Canadians consumed as much as $6.2 billion worth of cannabis in 2015 making it the world’s second-largest legal cannabis market next to California. Many investors will continue to get high on Canadian cannabis, but how high is yet to be determined. Although, one thing is certain – there is A LOT of money to be made in the Canadian cannabis markets. So, be sure to conduct thorough due diligence and choose the opportunities you feel have the most upside potential moving forward.
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Mark's strong passion for cannabis was born over half a decade ago when he discovered the medical benefits it brought to him and many other people in his life. He recently left the financial world where he worked as a discretionary portfolio manager for a boutique asset management company. Now his time and efforts go towards fighting the stigma around cannabis and ending prohibition.